1. PPP. Japan has typically had lower inflation than the United States. How would one expect this to affect the Japanese yen's value? Why does this expected relationship not always occur?
2. IFE. Assume that the nominal interest rate in Mexico is 48% and the interest rate in the United States is 8% for one-year securities that are free from default risk. What does the IFE suggest about the differential in expected inflation in these two countries? Using this information and the PPP theory, describe the expected nominal return to US investors who invest in Mexico.